Coupons are an important marketing tool for many consumer goods and services including, but not limited to, products sold in supermarkets, drugstores and hardware stores. "Couponing" constitutes a substantial business per se and makes an even greater contribution to gross national product by its stimulation of sales of promoted goods and services.
Most coupons offer "cents off" the purchase price of promoted merchandise. There are at present seven major conventional channels plus a few relatively new systems employing mechanized devices for the distribution of cents-off merchandise coupons.
The most widely used and fastest growing conventional channel is the Sunday newspaper free-standing insert (FSI), which accounted for 33% of all coupons distributed in the U.S. during 1983.
Although this means of distribution offers widespread exposure, many of the individuals exposed are not immediately in the market for the promoted merchandise, and the redemption rate typically runs a mere 4.6%, so that by far most of the coupons printed and distributed at considerable cost are effectively wasted. In addition, about 20% of the redemptions are not in accordance with the terms of the coupons. Such misredemptions or fraudulent redemptions may be accidental or intentional on the part of the customer and with or without the connivance of the retailer. In some cases the retailer or personnel employed by the retailer may clip coupons from a newspaper and "redeem" them for personal gain. The cost of misredemptions in the U.S. in 1983 was approximately $350 million. Finally, the retailer's cost of shipping and handling each coupon currently averages an estimated $0.078. This expense is in addition to the costs paid to and borne by other businesses involved in the distribution-redemption and clearing cycle. One such additional cost, which is borne by the coupon issuer, is for making test counts of coupons returned to the issuer by the clearinghouse. This cost amounts to about $0.02 per coupon redeemed and cleared.
This channel of distribution is characterized by the further problem that there is no control, other than the coupon expiration date, which is typically a fairly remote future date, over the timing of coupon redemptions. It sometimes happens that coupon redemptions exceed projections, resulting in excessive coupon expense. Once the coupons are issued, there is little that can be done to protect against this expense.
Another problem characteristic of this channel of distribution is lack of exclusivity. While a particular FSI may offer exclusivity (for example, soap coupons limited to one brand or one manufacturer's brands), other FSIs in the same newspaper may include competing coupons.
Still another problem of this channel of distribution is "double couponing", which is a practice of retailers of giving double (or some other multiple) of the face value of a coupon. The practice of double couponing is an effective marketing tool until all stores in an area double coupon. At that point the competitive advantage is lost and the practice becomes a problem for the retailer. Double couponing costs an estimated 0.66% of supermarket sales, which is clearly a serious matter in this industry, which reports profits of only about 0.85% of sales.
A second mass-media distribution channel for cents-off merchandise coupons is a single offer in a manufacturer's advertisement in a newspaper. This channel accounted for 23% of coupons distributed in 1983.
A third such channel is multiple newspaper offers in a co-op format, which accounted for 15% of coupons distributed in 1983.
A fourth such channel is magazine coupons (not including pop-out type), which accounted for 13% of coupons distributed in 1983.
A fifth such channel is newspaper coupons printed in the body of the paper, which accounted for 6% of coupons distributed in 1983.
The redemption rate for each of the second through fifth channels listed above is less than 4.6%, and the drawbacks of each (misredemptions, expense, lack of control, lack of exclusivity, double couponing, etc.) are as substantial as those described above in connection with the Sunday newspaper free-standing insert.
Another conventional channel of coupon distribution is direct mail, which accounted for 3.8% of coupons distributed in 1983. The redemption rate for this channel is 9.3%, which is higher than the rates for any of the channels discussed previously, but, as compared to those channels, the cost of redemption and exposure to fraud are as great, the distribution cost is far greater, and the other drawbacks are comparable.
In-package and on-package coupons accounted for 6.2% of all coupons distributed in the U.S. during 1983. The redemption rate ranges from 12.7% to 18.1%, depending on the location of the coupon. This is higher than for direct mail, but the shortcomings (misredemptions, expense, etc.) are similar to those described above.
Recently, in-store coupon distribution systems employing mechanical devices have been developed. In these systems, a plastic card (such as a credit or debit card) with a magnetic stripe or UPC code is required to initiate the coupon selection process. The selected coupons are physically issued to the customer in-store and redeemed by the customer at a checkout station after completion of shopping. While the coupon redemption rates for these systems are far higher than for any previous system, misredemptions and the cost of redemptions, clearing and test counting are problems which the conventional mechanized distribution systems do not solve.
Moreover, the current system of clearing coupons which are distributed and redeemed in accordance with any of the methods described above involves physically sending redeemed coupons to a clearing house. The clearing house returns the coupons to the manufacturer (issuer) and issues debits and credits to the manufacturer and retailer, or factors coupons for the retailer. This physical handling of coupons is expensive, cumbersome, error prone and slow.